The political effects of climate change rulings

The Paris Agreement's lack of international enforcement mechanisms results in a set of predictable problems: governments set targets that are insufficiently ambitious and many governments are not even on track to meet their own modest targets. Recently, domestic courts in a number of countries have issued judgments that oblige governments and private actors to act sooner, more decisively, and in accordance with international standards. To what extent can national litigation transform the global climate regime from “soft law” to “hard law” and meaningfully enhance the prospects of combating climate change? This paper partially answers this question by examining how court rulings affect the asset prices of climate sensitive industries. If investors believe that a court ruling increases the credibility of stronger mitigation policies, then this should affect asset prices. The theory stipulates that while landmark rulings favorably affect prices of renewable industries, they may have little effect on the pricing of fossil fuel companies, for two reasons. First, fossil fuel companies can usually sell their assets to less regulated firms, which leads to a flight of fossil fuel assets controlled by private firms or firms headquartered in countries with looser domestic regimes. Second, market actors expect that governments will pay off fossil fuel companies for leaving their assets in the ground. This latter expectation is not simply due to lobbying but also because most countries have extensive property rights and investor protections enshrined in their laws. Courts may thus both force fossil fuel companies to reduce emissions and protect them from the financial consequences of these rulings.